Economists Disagree With Paul Ryan’s Claim That ‘Debt Is Crushing Our Economy’

Over the past three years, House Budget Committee Chairman Paul Ryan (R-WI) has repeatedly introduced budget resolutions that contain draconian spending cuts in an effort to stave off the debt crisis he says is right around the corner if it isn’t addressed immediately. Ryan’s plans, all three of which have passed the House of Representatives, would almost surely add to the debt instead of decreasing it, but his main view is that America’s current level of debt is weighing down the economy, a claim he repeated to Fox News’ Greta Van Susteren Thursday night.

“The debt is crushing our economy, it’s slowing us down, and it’s guaranteeing the next generation has a diminished future,” Ryan said. “And we believe we have a moral obligation to balance this budget to get a healthier economy and create jobs.”

The source of those claims is a paper by Carmen Reinhart and Kenneth Rogoff that shows that economies grow more slowly when their debt-to-GDP ratios are in excess of 90 percent. But as Bloomberg reports, there is no economic consensus around those findings, especially when it comes to large economies like the United States:

“The argument that heavy debt loads slow economic growth doesn’t hold a lot of water,” says Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia who oversees $12 billion. “It suffers from a mix-up of cause and effect: When weak economic conditions arise, it tends to encourage deficit spending, which is what has led to more U.S. debt being issued, and not the other way around.” [...]

“The Rogoff-Reinhart 90 percent is really quite a fragile number,” says Joseph Gagnon, a former economist in the Fed’s monetary affairs division. “There is no threshold like that for countries that have control of the currency they borrow in.”

Moreover, there is no evidence that the debt is threatening the United States in the short-term. Borrowing costs are at historic lows — as Bloomberg notes, the cost of paying off the debt is lower today than it was when Ronald Reagan was president and financial markets are “begging” the U.S. to borrow. Instead, there is plenty of evidence that the focus on debt and deficit reduction has slowed the economic recovery. Government spending has plateaued since the 2009 stimulus effort that kickstarted the recovery, so while government spending traditionally pulls the economy out of recessions, spending cuts hampered efforts to boost the economy this time.

Investments to help the economic recovery now would fuel growth that reduces deficits and, thus, improve America’s long-term debt outlook as well. The current crisis facing the U.S. isn’t a debt crisis, but rather an unemployment crisis that is being exacerbated by lawmakers who focus too much on the debt.

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Back To 1948: Ryan’s Fantasy Budget Cuts Spending To Its Lowest Level In 65 Years

Over at Investors.com, Jed Graham ran the numbers on Rep. Paul Ryan’s (R-WI) new budget for the House GOP, and found that by 2023, it would drive all government spending that isn’t either Social Security or interest on the debt to its lowest level since 1948. On every other occasion in the last 60 years that this category of spending dipped that low, unemployment was never over 4.5 percent — it’s currently at 7.7 percent.

Graham found, “the entirety of federal spending outside of Social Security and interest on the debt (16.4 percent of GDP in 2012) would shrink to 11.2 percent of GDP” by 2023, “a level not seen since 1948.” In fact, the situation is even worse, since in 1948 this spending did not yet include “ObamaCare, Medicare, Medicaid, NASA, the interstate highway system” or a host of other needed programs now in operation:

In fact, if Medicare is discounted as well as Social Security and interest payments, spending shrinks to 7.9 percent in 2023, the lowest levels for that slice since 1938.

This is tiresome and grossly irresponsible, but hardly surprising. Ryan’s previous budget would’ve shoved non-defense discretionary spending — which includes most of the government’s investments in economic growth, veterans’ health care, food safety, drug safety, consumer product safety, federal law enforcement, and more — to 2.1 percent of GDP. Since 1962, the first year for which we have comprehensive data, non-defense discretionary spending has never dropped below 3.2 percent of spending.

Nonetheless, Ryan’s latest budget once again aims for the 2.1 percent mark by 2023, leading Michael Linden at the Center for American Progress to dismiss it as fantasy. “[I]t’s is far easier to ‘cut’ the nebulous category called ‘nondefense discretionary’ than it is to cut actual programs, benefits, and protections that the public knows and likes,” Linden writes. “But in fact, for these kinds of cuts to actually come to pass, Congress — now and in the future — will have to get specific. And if they decide that they can’t, in reality, reduce these things to levels unheard of in generations, then Rep. Ryan’s claim to a balanced budget falls apart.”

Sure enough, American voters only support cutting spending when it’s vaguely referred to as “spending.” Name specific programs, and public support for cutting them utterly collapses.

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